Owners' Equity Paper
Prepare a response to the following questions:
Why is it important to keep paid-in capital separate from earned capital?
As an investor, is paid-in capital or earned capital more important? Why?
As an investor, are basic or diluted earnings per share more important? Why?
Both paid-in capital and earned capital are forms of capital but it is very important that both should be treated separately. Why should they be separate and not joined together? Before we answer this question, let us first analyze the meaning and the difference between the two:
Paid-in capital is the amount of investment by the investors of a company in exchange of stocks that are equal to capital stock plus paid-in capital. Another term that has been used to call paid-in capital is contributed capital. The paid-in capital is recorded as an entry on the balance sheet.
Earned capital is the result of the operations of the business. It is the capital accumulated as a result of a profitable business. It is undistributed income which is kept and remains in the enterprise and keeps on being used in order to gain more profit for the business
It is important that the two be treated separately and not together for the following reasons: Paid-in capital must be separate from earned capital because it is it does not reflect the company's performance. The source of earned capital is the net income. Hence, if these two types of capital are joined together, it would imply an ...
The solution discusses the importance of separating paid-in capital from earned capital. It also explains which is more important to an investor: the paid-in capital or the earned capital? the basic or the diluted earnings per share? References included.